The Ministry of Finance has notified Foreign Exchange Management (Overseas Investment) Rules, 2022 ("Rules") with a view to ease the restrictions on outbound investments in India.
The Overseas Direct investment ("ODI") rules were earlier governed by Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations 2004 and Foreign Exchange Management (Acquisition and Transfer of Immovable Property outside India) Regulations 2015. The Central Government has now issued Overseas Investment Rules replacing the Two Regulations.
The Rules has made significant changes to the framework for allowing overseas investments by Indian entities and resident individuals. It is now easier for domestic corporates to invest abroad while making it harder for loan defaulters and others probed by investigative agencies to remit funds overseas. The aim of these regulations is to align the current business and economic dynamics and help India in ease of doing business.
1. Overseas Investment
An investment by a person resident in India ("PRII"), shall be made in a foreign entity outside India, which is engaged in a bonafide business activity (i.e business permissible under any law in India or the host country) subject to limits laid down in the rules. Where such foreign entity is registered or incorporated in Pakistan or any other jurisdiction as advised by Central Government, prior approval of Central Government is required before any investment or transfer.
2. No Objection Certificate
Investors have to obtain NOC from banks or regulatory bodies like RBI, SEBI etc or investigating bodies like SFIO, CBI etc (where applicable) in case such resident investors have either been classified as a wilful defaulter by banks or whose account has been classified as Non-Performing Asset. In case no NOC is received within 60 days from date of making application, it shall be presumed that there is no objection to proposed transaction.
3. Pricing Guidelines
Transfer or Issues of equity capital of foreign entity from PROI to PRII shall be made at arm’s length price which shall be verified by AD Bank.
4. Transfer or Liquidation
Where a transfer of investment takes place on account of merger, demerger, buyback of foreign securities or in event of liquidation of foreign entity, approval of competent authority is required as per Indian Laws or laws of host country.
5. Restrictions and Prohibitions
A PRII shall not make overseas investment in foreign entity engaged in real estate, gambling in any form or dealing with financial products linked to Indian Rupee without specific approval of RBI. Indian entites can use only internal accruals while investing in Startups of host Countries whereas the resident individuals can use their own funds. Further no investment shall be made in foreign entities that have invested in India, directly or indirectly in more than two layers of subsidiaries.
6. Restructuring
A PRII having invested overseas in foreign entity may permit restructuring of balance sheets of such foreign entity which has incurred losses for preceding two years. Further in case the diminution (Reduction in size) of entity where original investment is more than Rs 10 million or amount of such diminution exceeds 20% of the total value of the outstanding dues, a registered valuer shall submit a valuation report.
7. Restrictions on acquisition or transfer of immovable property outside India
A PRII shall acquire or transfer any immovable property outside India only with General or Special permission of RBI except for certain properties as provided. Such acquisition from non-resident can be by way of:
- Inheritance
- Jointly with a relative who is a PROI
- Income or sale proceeds of assets, other than ODI acquired overseas
- Purchase of foreign exchange or Purchase out of remittances sent under Liberalised Incentive Scheme of RBI
An Indian entity having an office overseas may acquire an immovable property for business or residential purpose as per directions of RBI. Further a PRII who has acquired an immovable property outside India can transfer such property to PRII eligible under these rules or a charge can be created on such property as per the directions of RBI.
8. Schedule I& II: Manner of making Overseas investment By Indian Entities
- An Indian entity may make Overseas Portfolio Investment ("OPI") not exceeding 50% of net worth as per latest audited balance sheet. OPI refers to investment, other than ODI in foreign securities, but not in unlisted debt instruments or any securities issued by person other than IFSC.
- The total financial commitment by an Indian Entity in all the foreign entities taken together shall not exceed 400% of net worth as per latest audited balance sheet or as directed by RBI.
9. Schedule III: Manner of making Overseas Investment By Resident Individuals
- An Individual may make ODI by way of investment in equity capital or OPI, subject to the overall ceiling under Liberalised Incentive Scheme. Currently, the LRS allows an individual USD 2, 50,000 outward investment per year.
- A Resident individual can now receive a gift or acquire foreign securities by way of inheritance from any non-resident outside India. Earlier this was allowed only from relatives. This acquisition shall be subject to compliance of Foreign Contribution (Regulation) Act, 2010.
10. Schedule V: Overseas Investment in IFSC by person resident in India
- A PRII may make an overseas investment in an IFSC (International Financial Service Centre) in India within the prescribed limits
- A PRII can make contribution in investment fund or vehicle set up in an IFSC as Overseas Portfolio Investment.
- An ODI can be made by a resident individual in a foreign entity, including an entity engaged in financial service activity (except in banking and insurance) in IFSC if such entity does not have subsidiary or step down subsidiary outside IFSC where the resident individual has control in foreign entity.
In conjunction with the RBI, Government of India have put forward comprehensive manner of making investment overseas. Considering ever evolving global scenario, these rules have been brought in place to simplify business needs in India to be at par with the global value chain.
CAclubindia
